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The state and city of New York has today sued BNY Mellon for using “fraudulent rates” in collecting $2 billion of fees from public and private pension funds in foreign currency transactions.

This follows the case back in February when The Arkansas Teacher Retirement System which oversees around $11 billion in assets sued State Street Bank alleging that for more than a decade The bank violated state law by overcharging many customers for currency trades.

In the case of BNY Mellon, the compliant states..

“BNY Mellon consistently misrepresented to customers the rates it would give foreign currency transactions. Instead of providing the best interbank rates– as it promised – BNY Mellon gave the worst or nearly the worst rates of the trading day.”

In the old days of FX trading, such a practice was called applying the “rates of the day”. Which meant that small trades were priced at just above or just below the low and high for the day for each currency pair – you really could drive a bus through the bid-offer spread.

What is surprising here is that in both these cases, we are not dealing with small corporate or retail clients. In both cases we are dealing with clients that one would expect to be at the more ‘sophisticated’ end of the spectrum, and well aware of where FX rates are trading.

One can only assume therefore that these FX transactions were not priced online or over the phone with clients, but were ‘applied’ to portfolios and accounts for currency conversions and other transactions and therefore were not validated on a case by case basis.

Adoption of Transaction Cost Analysis (TCA) Tools

The equity markets have long used Transaction Cost Analysis (TCA), to benchmark performance. Such tools are now being used in the FX space.

However, for such TCA tools to be effective, they must be applied by the global custodian at the level of the fund administration, otherwise direct comparison between rates applied on individual transactions and prevailing market rates at the time cannot be made.

Superior levels of customer service: TCA should not be thought of as a stick used by the buyside to force banks to provide better rates. Rather banks should embrace TCA tools as part of their overall strategy of delivering greater added value services for clients.

It’s true that many buyside firms are mandated (by their execution policies) to request multiple quotes for trading, usually via multi dealer platforms.

However, a large number could also satisfy their execution policy by trading on single dealer platforms, if the SDPs provided the TCA tools to enable them to ‘demonstrate’ the quality of their execution on that platform.

It would be a shame if such tools were forced on the banks through regulation, rather than banks embracing these tools to add greater and levels of service for their clients.